From April 2020, the responsibility for assessing the employment status of a contractor will be passed from the contractor to the medium and large private sector companies that engage them, under changes to IR35.
If you are a contractor, or a business who engages contractors, you will no doubt have heard of IR35. First introduced in 2000, IR35 is designed to reduce “tax avoidance” by contractors whom HMRC believe to be “disguised employees” – people who bill for their services via an intermediary (usually their personal service/ limited company), typically paying themselves in dividends and so avoiding paying employee income tax and National Insurance contributions (“NICs”), when, in reality, their working arrangements reflect employment.
One of the key questions under the IR35 legislation is whether the individual would have been an employee of the business (the “Engager”), if they had been working directly for it. Therefore, the case law looks at various tests for employment status such as whether there is mutuality of obligation, control by the Engager over the individual and whether the individual has been integrated into the Engager’s business.
Although HMRC has an online tool to check employment status for tax (“CEST”) to determine employment status, there are concerns about its accuracy, as it is necessarily formulaic, rather than holistic, in approach.
If IR35 applies, the current rules treat the individual and the intermediary as employee and employer for both income tax and NIC purposes. This means that the burden falls on the individual through the intermediary, rather than on the Engager. HMRC can go back at least six years to determine whether or not IR35 applies and can request payment of outstanding extra income tax, National Insurance contributions, as well as penalties and interest.
However, as from 6 April 2020, the IR35 reforms that have already taken place in the public sector are set to be extended to private sector contracts. The burdens of proving if a working relationship is within or outside of IR35, and ensuring that the correct amounts of tax and NICs are deducted, are moving to the Engager rather than the contractors themselves.
Medium and large companies in the private sector that contract with personal service companies for the provision of a worker’s services will have to account for tax and NICs through PAYE. These changes make hiring contractors a riskier business, as the Engager will be liable for a fine if they incorrectly identify an IR35 contractor as falling outside of IR35.
Where services are provided to small businesses by contractors operating via intermediaries, the intermediary will continue to be required to ‘self-assess’ and to account for tax and NICs where it is concluded that the IR35 rules apply.
Small businesses are those that meet two or more of the following criteria:
- Turnover – not more than £10.2 million
- Balance sheet total – not more than £5.1 million
- Number of employees – no more than 50
Although the IR35 rules only apply to tax, the question of whether a worker is an employee or some other form of worker has implications in employment law as well, as employees benefit from more comprehensive statutory rights than other workers.
If you are a contractor working through an intermediary or a business that engages contractors, you should review those arrangements now, well in advance of the new rules coming into effect and get advice from legal experts to make sure you are compliant with IR35 and other laws and regulations.
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